First Small Business Loan? 7 Things to Consider

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Is this your first time venturing into the small business loan frontier? Obtaining a small business loan is just one of the first steps to launching your business. Proper financial planning, however, is critical to your success.

There are two key things to keep in mind as a small business loan first-timer. If you're seeking a small business loan, the way you present your business idea, business plan and financial forecasts can be the difference between gaining or not gaining investors' or a bank's approval. But once you do get a business loan, how you manage your operations and where those funds go can make or break your entire business.

From creating a budget to managing costs, there are several steps you can take to make the most out of obtaining and managing small business loans. Holly Nicholas Signorelli, a certified financial planner and CPA, advises aspiring entrepreneurs and small business owners to maintain realistic expectations. Based on more than 20 years' experience, Signorelli shared the following do's and don'ts of first-time small business loans.

1. Do create a real budget.

About 90 percent of the time, clients come in with a huge budget made up of millions of dollars in profits, Signorelli said. But when you start to go through the line items, there isn't any real backup to substantiate the numbers. Instead, there is always some hype about the product, the market in general and, most of all, "the potential." Banks and investors don't want to buy your idea; they want to make a profit, Signorelli stressed. For them to believe in your idea, they have to believe there is a profit. With very few exceptions, they are not going to invest in your idea if it doesn't make sense, or if it feels too good to be true, Signorelli said.

2. Do have budget references.

Make sure that every single line item has a reference behind it, Signorelli said. "Real figures, real research — get down and dirty on it," she said. "For example, if you are providing a service and your budget states that you can sustain XX amount of customers per month at XX amount of dollars, then the price of the service will be easy to show, given the average price of that service in your geographic area," Signorelli said. However, you need to back up why the customers would come to you versus the competition. "That's 'down and dirty,' and you can't get too detailed; keep it short and to the point with backup," Signorelli said. "Think about it: When you are reading a budget, you don't want someone rambling about their pipe dream. You want to know that the person understands what it's going to take to make a profit and has a clear plan to bring in business." In other words, you want details, but you want them to be short and concise.

3. Don't overestimate your income.

"In 20 years, I have never seen a budget where the income was as high as predicted in the first year," Signorelli said. This is critical, because the lack of income in the first year is what causes 80 percent of small businesses to go out of business, she said. "Once your budget is done, go back to it and reduce your income 25 to 50 percent less than what your due diligence led you to put on the report," Signorelli advised.

 

4. Don't underestimate your expenses.

"There are things that you underestimated, no matter how meticulous you were, and there are things that you forgot altogether," Signorelli said. "Just like income, you need to go back to your budget and take your expenses and increase them by 25 to 50 percent."

5. Do have extra funds.

As a small business owner, it's critical that you have enough savings, to make sure you can pay your bills during the first year, Signorelli said. "It was hard enough to get your loan, but I promise you that six months into when you are not profitable, no one will want to loan you more money to get you though the next six months," she said.

6. Don't stress about finances.

To make it through the first year and build a profit, you want to focus on marketing and bringing business in, so you don't need to stress about finances, Signorelli said. Manifesting and building a business requires you, the owner, to believe in yourself and your new small business. With the right budget, you will get the right amount of money from the right investor, giving you the freedom and confidence to focus on your dream and make it happen, Signorelli said.

7. Do learn from your mistakes.

Yes, it's OK that you made mistakes, as long as you learned lessons from them.

"I worked for a great CPA right out of college for five years to learn all I needed to know to run a business," Signorelli said. "I still made mistakes in the first few years, but the foundation had been set and above all else, it was not an option for it not to succeed. It was my life, and whatever you are taking on must be your dream that you will move heaven and earth to make happen."